New laws mean you can now access your pension at any point. Know nothing about pension? Time to #GetDecoded…

Pension means the government signs me off as too old to work, too young to die right?

Not quite…

There are three types of pension:

1. State Pension = regular moneys from the government going to people who are above the official retirement age (61 and 68 depending on when you were born and what gender you are) and who have paid national insurance (taken automatically from your pay check).

Decoded: £115.95 per week and it’s going up next year!

2. Workplace/Private Pension=

Private: It’s all about what YOU put in. You pay in over the years and when you retire you can invest the end amount into a pension scheme by a pension company. What you get back depends on how the investment goes. Some schemes move the money into lower risk investments as you get older.

Workplace: a percentage of your salary automatically goes into a pension pot, which is matched by your employer (in most cases). Same as with a private pension, at the end you can invest in a pension scheme to grow your money.By 2018, a law will be implemented stating that your employer must automatically enrol you in a pension pot scheme if you’re over 22, under State Pension age and earn more than £10,000 a year.

Decoded: Pay in now to receive an eternal salary. (Like that’s easy to justify)

3. Defined Benefit Pension = an employer promises to pay you a specific amount per year as a pension when you retire. The amount is calculated depending on the number of years you work and the salary you earned.

Decoded: E.g. If you worked for 20 years for a company on £30,000 per year salary and your employer has agreed your accrual (adjustment) rate at 1/50th:

(20 x 30,000) divided by 50 = £12,000 a year in pension

SO WHAT ARE THESE CHANGES THEN?

– From the age of 55 you will now be able to take out ALL the money in your pension pot as a lump sum and spend it how you wish. Or you can take it out in a series of smaller amounts.

-The first 25% you take out will be tax free; the other 75% will be taxed as if it were normal income. No such thing as a free lunch I guess…

-There is now no need to buy an annuity. This is an annual retirement income and in the past you HAD to buy one.

How it works: you pay a lump sum to an annuity provider or insurance company and they give you an annuity income for the rest of your life.
The company usually invests the money in government bonds so what you get in return is affected by the interest they can get from that investment. Complicated? Even more so when different companies offer different rates – and what they offer you will be affected by your health, age and what’s going on in the financial market. So if you’re going for one of these, it’s wise to shop around for the best deal.

– It’s up to you if you want to invest the money in a pension scheme or just keep it as cash.

– Changes apply to those in workplace/private scheme. If you are in a defined benefit scheme you have to transfer across to a private scheme take advantage.

Pensions Decoded: a lot more choice about what you do with your money. No-where near pension age? Don’t worry: at least you have plenty of time to go through your options…